+ NPL ratio stable as O&G sector stabilises. NPL ratio is stable at 1.26% for the past four quarters. New NPAs formation has been declining over the four quarters too. Management’s outlook is more sanguine as they see better utilisation of offshore O&G assets though charter rates and duration remain low. There were also no new names going into NPA and specific provisions were largely set aside for existing restructured loans.

The Negatives

– WM Income declined QoQ due to a lower number of blockbuster funds launched in 3Q17. WM income declined 6.1% QoQ to S$741mn but is still 18.2% higher YoY.

– OCBC Wing Hang NIM declined to 1.57%, down 3bps from 2Q17. The fact was, within OCBC Wing Hang, Hong Kong and Macau operations registered higher NIM. But the consolidation of OCBC China into OCBC Wing Hang caused the NIM in aggregate to decline. The reason is treasury business is a large component of OCBC China’s operations and in 3Q17, the treasury business experienced some volatility.

– Net trading income continues to be weak. Similarly, universal banks and investment banks in the developed west have broadly reported weak trading income in the past 2 quarters citing the challenge of low market volatility globally.

Outlook

OCBC’s guidance on loans growth has been revised upwards from mid-single digit percentage to high single-digit growth of 7% to 8% in FY18. But we pencilled in a more conservative loans growth number of 6% for FY18e. Therefore we expect NII to grow c.6% in FY18 too as long as a moderately strong economy is able to support the pass-through of higher interest rates. Other growth catalysts in FY18 will be the stronger real estate-related loans in Singapore as enbloc sales transactions start to flow into the market. And OCBC’s wealth management will benefit from the wealth effects of the enbloc sales as vendors from successful enbloc sales will likely engage wealth managers to manage their new found wealth.

Valuation: Gordon Growth Model

3-Year Historical Price-to-Book

Investment Actions

Upgrade to “Buy” from “Accumulate” with a higher TP of S$13.48 (previous TP S$11.95) based on Gordon Growth Model.

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About the author

Jeremy TeongInvestment AnalystPhillip Securities Research Pte Ltd

Jeremy covers primarily the Banking and Finance sector. He has 6 years’ experience in equities related dealing and research roles.

He graduated with Bachelors of Mechanical Engineering from Nanyang Technological University.